Market outlook for the next week (January 08 to January 12)

8 Jan 2024 , 08:23 AM

WHAT LED TO AN AMBIVALENT MARKET?

The best description for the market in the first week of January would be an ambivalent market. The market is coming to terms with a lot of things. Firstly, it is coming to terms with the fact that the rally in the market has been frenetic in last 4 months. From being volatile and unsure, the Nifty and Sensex are at life-time highs. That takes time to sink in. Secondly, valuations are not entirely stretched but Buffett Ratio is already fairly high. We are looking at a market cap of $4.36 trillion when the GDP is around $3.50 trillion; implying a Buffett ratio of 1.25 times. That may not be high by global standards, but it is much higher than at any time other than the global financial crisis. The investors are adapting to that also. 

Thirdly, the last 2 years saw millions of first-time investors come into the market. Most of them never had the privilege of seeing market highs, market volatility or the other side of the market cycle. The markets will need to give them some time to adjust to all these changes. Lastly, it was about the constant shift in domestic and global macros. Macros have been in a state of flux; but they have turned for the better. The US is no longer worried about hard landing and Indian markets are talking about the Goldilocks effect. That will also take time to sink in. That is why, this year has started off on an ambivalent note. There have been lot of surprises in the recent past and it just needs time to fully sink in.

DO NOT IGNORE THE BIG PICTURE

Behind the Mexican wave of the Nifty and Sensex and the relentless optimism of investors, there is reality that India needs to grasp. Indian GDP, today, stands at $3.5 trillion. India, at the current growth rate, is poised to touch $5 trillion in next 6-7 years. That will make India, the third largest economy in the world after the US and China. That is going to be huge. During this period, capex is likely to drive a lot of the growth and the massive investments that you see today from the likes of Apple into India is just the proverbial tip of the iceberg. 

Over the next 10 years, India is set to emerge as a serious contender for the job of manufacturer to the world. China may still be the world’s largest factory, but India will be a force to reckon with. Thirdly, amidst this GDP surge, per capita GDP will also rise from the current $2,500 to $3,700. That will unleash a massive surge in consumption and demand for a plethora of goods. The sum total of all these factors is likely to keep the India story ticking.

WHAT TRIGGERED THE MARKET MOVES IN THE PREVIOUS WEEK? 

Broadly, there were 6 factor that influenced the Indian equity markets, in the first week of the New Year.

1. As the New Year dawned, the Red Sea crisis continued to be the biggest threat to world trade. Houthi rebels based in Yemen have been firing missiles on ships passing through the Red Sea. For most of Asia’s trade with the US and Europe, the stretch from the Red Sea leading to the Suez Canal is the lifeline. In last few weeks, we have seen higher insurance costs, and higher freight rates on that route. Recently, the world’s largest shipping company (Maersk of Denmark) has decided to opt out of the Red Sea route. That means; other shipping lines would also follow suit. After all, Maersk continues to be an influential voice in shipping. 

    

2. The JN.1 variant may have been briefly forgotten, but the risk has hardly gone away. India is still seeing a lot of casualties on a daily basis, although the government has not declared level of emergency to deal with the threat. For now, it looks like a brief irritant, but we have elections coming up and that is when people mingle in public in large numbers. That is a recipe for such a situation to spread. That is something the markets are wary about and that is showing in the market ambivalence.

    

3. The US Fed minutes were the big disappointment of the week. On Wednesday, the Fed put out the minutes of the December Fed meet, but did not offer any time table for rate cuts. In fact, the Fed minutes did not even mention the word “rate cut.” That perturbed the markets. They were expecting the Fed to provide a timetable for the rate cuts in 2024, if not in 2025. In response, the CME Fedwatch cut its rate cut forecast for 2024 from 175 bps to 150 bps. However, the CME Fedwatch continues to be overly dovish about rates, something many analysts now feel may be like jumping the gun.

    

4. The other big piece of data came towards the end of the week. The MOSPI put out the first advance estimate (FAE) of FY24 GDP at 7.3%. That is good because it is 10 bps better than the FY23 figure and 30 bps better than the upgraded RBI estimate. This is the first advance estimate and the second estimate will be out on the last day of February while the actual FY24 GDP will only be out on  the last day of May 2024. Growth is going to be better than last year, despite a higher base. But there is a downside. While real GDP growth is up, nominal GDP growth rate is sharply lower at 8.9% for FY24, compared to 15.5% in FY23. That overall level of economic activity will not grow at the same rate and that has implications for tax collections and jobs.

    

5. The twin global macro variables US bond yields and dollar index showed a small bounce in the latest week. The reasons were not far to seek. The Fed disappointed the market; not giving any guidance on rate cuts. The markets were expecting that the Fed would give a timetable on rate cuts, but no such thing was forthcoming. Obviously, the Fed was cautious due to the ongoing crisis in West Asia, as it had the potential to raise energy inflation. If energy inflation went up, overall inflation would also go up and that brings back the debate on rates. That is why, the Fed does not want to commit itself to a rate cut timetable, unless it has clarity that it can handle the inflation risks on the energy front. The dollar index also bounced hinting that if the Fed was going slow on rate cuts then the dollar fall was not really justified. 

    

6. Finally, it was a week when FPI flows were rather tepid at just about $574 million. However, this comes after 5 weeks in which the FPIs had infused $9 billion into Indian equities. On top of that, there was also the infusion into debt and hybrids that was also well over $2 billion in the last few weeks. Overall, the traction of FPI flows has stayed, although the last week and the first week of the year are normally quiet weeks. A clearer picture may only emerge in the coming weeks of January 2024.

Going ahead, a lot will depend on the quarterly results for Q3, which starts with the IT biggies this week. Amidst this confusion, the good news is that India continues to be the preferred destination for the Jefferies’ Greed & Fear portfolio. PSUs are the big story and that means, the rally may have more legs to it.

STOCK MARKET TRIGGERS FOR COMING WEEK TO JANUARY 12, 2024

The coming week would be the first regular week after 2 week of extended holidays for most parts of the world. Here are some triggers to watch out for.

1. The Nifty and the Sensex closed the week almost flat amidst ambivalent cues. However, alpha hunting in select stocks was still rampant as the next rung indices like the Nifty Next-50, the Mid-cap index, and the small cap index gained anywhere between 2% and 2.5% during the week. The large caps may have been taking a brief halt, but the interest in mid-caps and small caps still continues.

    

2. It is the week of big results season; and Q3 is normally a weak season as tech and corporate spends tend to slow down in this quarter. A total of 65 companies will announce their Q3 results this week, including IT bigwigs like TCS, HCL Tech, and Wipro. In all these cases, there are concerns that constant currency (CC) growth in revenues may taper to around 1.6% and margins could be under pressure. HDFC Life is also slated to announce results this week. 

    

3. December CPI inflation data and IIP data is expected to be announced on Friday. Inflation, which had risen to 5.55% in November, is expected to rise further. However, the positive cues from the IIP are likely to continue after showing 11.7% growth in October. November is also likely to see positive cues from manufacturing IIP. 

    

4. US inflation data for December 2023 will be put out on Thursday. The consumer inflation may not be as critical as PCE inflation for the Fed, but it still sets the tone for prices in the US economy. It is expected that the consumer inflation in December may edge higher by 10-15 bps from the last reading of 3.1% in November 2023. 

    

5. The markets will also focus on the evolving Red Sea crisis, which just worsened with Maersk Lines deciding to withdraw all its ships from the Red Sea route. It has already pushed up freight rates and it could also mean that Brent could spike above the $80/bbl mark if the stand-off in West Asia continues. 

    

6. With normalcy returning to the activity cycle, FPI flows will hold the key this week. In the last 2 weeks, total FPI flows at $1.6 billion were relatively tepid. However, this comes on top of $8 billion of inflows from FPIs in previous 4 weeks. However, January has not been positive for Indian markets and that may be an overhang.

    

7. Much of the FPI action is also about the rupee action and the rupee action is dependent on the dollar index (DXY). That has bounced in the last few days, but is still well below recent peaks. However, the strong FPI flows and the continuance of the Japanese Yen carry trade should be short term positives for the Indian rupee.

    

8. Other key data points from the US include Trade balance, API crude stocks, Wholesale inventories, initial jobless claims, PPI, MBA mortgages. In other cues, the focus will be on Retail sales, IIP sentiments, and jobs in the EU; Household spending, and current account in Japan; and China PPI, inflation, and vehicle sales.

NIFTY NEXT RESISTANCE AT 21,900 AND SENSEX RESISTANCE AT 73,200

The Nifty and Sensex closed with marginal losses this week, but you can almost say that markets were flat. For the Nifty, the level of 21,900 will be the next resistance while 21,500 will be the next Nifty support. With VIX down this week to 12.63 levels, the Nifty should once again become a buy on dips story. That should help the story sustain for the time being. Remember, both the principal indices are very close to lifetime highs.

For now, Nifty has an immediate resistance 21,800 while Sensex has next resistance at 73,200 levels. That is still some time away. Any breach of the Sensex above 73,200 with volumes opens the doors for 75,000. The sharp fall in the volatility is indication that this still remains a buy on dips market. However, the action may be more pronounced in the mid-cap and small cap space, rather than large caps. Also, the strategy for investors from current levels must be more of a bottom-up approach than a top-down approach.